If Social Security is Plan A, it’s time for Plan B

If you’re retired, don’t worry; if you’re under 40, worry

BOSTON (MarketWatch)—If Plan A in your retirement scheme is Social Security, it’s time to start working on Plan B.

Based on this week’s report from the folks responsible for the Medicare and Social Security Trust Funds, Americans—and especially those under age 40—need to reconsider their retirement plans.

Absent major action by lawmakers, the annual reports say that the combined assets of the Old-Age and Survivors Insurance and the Disability Insurance trust funds will be exhausted in 2033. That’s three years sooner than was projected last year. And the Disability Insurance, or DI, trust fund will be exhausted in 2016, two years earlier than last year’s estimate.

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Come 2033, just 21 short years from now, Social Security will pay just 75% of scheduled benefits, just 75 cents on the dollar. So, instead of getting, say, $1,000 per month from Social Security, you’ll get just $750 per month come 2033. Read the Social Security Trustees report.

Meanwhile, the outlook for the social insurance program that covers nearly 50 million elderly and disabled people was slightly worse than findings from last year. The trustees, as they did last year, forecast that Medicare’s hospital insurance fund would begin to run out of money beginning in 2024. Read the Medicare Trustees report.

So what adjustments do you need to make to your retirement plan given the latest reports from the trustees of Social Security and Medicare?

If you’re already retired, don’t worry

Well, if you’re already retired, don’t worry. “The advice I give people is that if they are already retired, I see little risk to benefits,” said Jeffrey Brown, a finance professor at the University of Illinois at Urbana-Champaign. “No politician will cut for current seniors.”

Others share that opinion. “I would tell those living in retirement or very near retirement, make your decisions based on the current rules,” said Bill Meyer, the president of Retiree Inc. “History tells us that Social Security benefits will not be impacted for those in or very near benefit-claiming age. For example, it took seven and 17 years respectfully from the time change (for Social Security) was announced to implementation back in 1983 and 1977.”

But for those who plan on retiring in 2033 and beyond, the advice is much different. “It might be smart to look at the worst case,” said Andy Landis, the founder of “Thinking Retirement and the author of Social Security: The Inside Story.”

“What if Congress does nothing between now and 2035? At that point Social Security payments could be cut up to 25%. If you’re a pessimist, work that into your retirement plan,” Landis said.

If you’re under age 40, start worrying

In other words, anyone younger than, say, 41 today should plan to get just 70% to 75% of promised benefits, Brown said.

Unfortunately, there’s no silver bullet to make up the difference between what those retiring in 2033 expected to get from Social Security and what they will get.

Those folks should consider the usual strategies and tactics: up the amount they save toward retirement; invest differently, perhaps with an emphasis on creating guaranteed inflation-adjusted income not unlike that provided by Social Security; delay retirement; work part time in retirement; delay taking Social Security; and consider any and all ways to turn assets into income, be it home equity, the cash value in your life insurance policy, or the collectibles in your curio cabinet.

Optimize your Social Security benefit

Of all the bromides, however, delaying—or what Meyer and other experts refer to as “optimizing” Social Security benefits—is the perhaps the most important. For one, the average American who optimizes when to claim Social Security can “make their savings last two to 10 years longer,” according to Meyer.

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